Despite volatility, Malaysian capital market to grow this year

Despite volatility, Malaysian capital market to grow this year

The Malaysian capital market is expected to show positive growth this year, despite, like all emerging markets, being affected by periodic episodes of volatility emanating from external factors, according to the Securities Commission Malaysia’s (SC) annual report for last year released recently.

In its “Capital Market Review and Outlook” the SC said: “The capital market will continue to remain resilient with strong fundamentals in place and significant pools of domestic institutional liquidity.

“Underpinned by a robust regulatory architecture and strong market infrastructure, the Malaysian capital market will provide long-term value and growth potential for all participants.”

It said that despite the challenging global macroeconomic environment, the Malaysian economy is expected to grow steadily. The government GDP forecast is for a growth of between 4 and 5% in 2017, higher than the global average of 2.7% projected by the World Bank.

Growth is expected to be supported by sustained private domestic demand, and exports boosted by a turnaround in commodity prices. “Furthermore, the government’s strong commitment to enhance revenue, curb expenditure and trim the fiscal deficit augurs well for the country’s economic fundamentals in the long run which will further boost investor sentiment. With the OPR (overnight policy rate) cut in July 2016, financial conditions remain accommodative to support growth and ensure sufficient liquidity.”

The SC said that the domestic capital market will continue to play a major role in supporting economic growth through the financing of business expansion and infrastructure development. “In 2016, a total of RM98.5 billion was raised through the capital market. Based on our current assessments, it is estimated that total capital raising through primary and secondary markets is expected to improve to around RM102 billion–RM105 billion in 2017.”

“Domestic fundraising is expected to be mainly driven by capital raising in the corporate bond and sukuk market for infrastructure financing as well as refinancing of bonds and sukuk. Fundraising through the corporate bond and sukuk market in 2017 is expected to approximate the sum raised in 2016, and amount to about RM85 billion.

“Equity fundraising is expected to be higher in 2017, and it is expected that approximately RM7 billion–RM9 billion will be raised via IPOs while RM10 billion–RM11 billion will be raised through the secondary market.”

The SC described the overall outlook for the Malaysian market as positive, with higher levels of growth expected across key market segments. “This is underpinned by higher levels of corporate activity within a backdrop of sound economic fundamentals in place to support a consistent growth outlook.

“Against prevailing global uncertainties, the low beta nature of the equity market coupled with better dividend yields relative to regional peers represents an attractive portfolio diversification opportunity. In addition, over the course of 2016, valuation of the FBMKLCI has reverted to its long-term mean.

“Earnings growth is meanwhile expected to regain a positive momentum in 2017, in line with the roll-out of more infrastructure projects, better economic fundamentals such as an improving fiscal deficit and current account surplus as well as improving liquefied natural gas prices in tandem with higher crude oil prices.”

“In particular, market consensus is positive for the oil and gas, plantation as well as construction sectors. Foreign shareholding in the equity market is at present in line with its long-term averages, with expectations of some inflows, assuming clarity in the global policy environment and an improvement in emerging market interest on the part of global investors.”

The outlook and review said that at the current level, the ringgit is widely perceived to be undervalued, presenting an opportune time for foreign investment in the domestic equity market.

Turning to the bond market it said: “The bond market on the other hand may see some fund outflows in line with the overall performance of global emerging market bonds given external factors but it should be mitigated by sound domestic economic fundamentals and domestic liquidity.

“Despite having relatively high levels of foreign ownership, the profile of a majority of investors in the bond market suggest holdings are by long-term investors and thus should provide stability to foreign ownership levels.”

The outlook and review said that investor sentiment globally is expected to be influenced by several key events in 2017. This included a potential shift in the US towards expansionary fiscal policy and continued Federal Reserve interest rate normalisation which will see an increase in interest rates this year.

Among other major factors are the Brexit negotiations (which will see Britain leave the European Union), several major general elections in Europe in the midst of scepticism over the EU, and the Chinese leadership transition.

“In addition to developments in the US and Europe, there are also signs that the crude oil market could rebalance as OPEC and non-OPEC nations have agreed to production cuts,” according to the outlook.

With fiscal policy in the US and UK expected to turn expansionary, there could be higher inflation for the global economy this year. The prospect of tax cuts and infrastructure spending in the US to boost productivity has lifted long-term inflation expectations in the US, causing the US Treasury yield curve to steepen and US equities to perform strongly.

“However, a sustained bull run in US equities hinges on effective delivery of promised fiscal stimulus. The US Fed also surprised the market by signalling a faster than anticipated trajectory for rate hikes in 2017 after raising rates for the second time since the Global Financial Crisis, in December 2016. The actual pace and timing of subsequent US Fed rate increases will as such pose uncertainty for financial markets globally,” the outlook said.

Meanwhile, the UK government has also pledged to increase infrastructure spending up to 2022. The UK inflation rate is expected to be higher this year compounded by the weaker pound which resulted in higher prices for imported goods.

“Global investors though will be more attuned to political developments in Europe starting with the Brexit negotiations. The negotiations are likely to take place over two years but early indication of a hard Brexit stance could exacerbate volatility in the global market. Investors will also pay close attention to general elections in Netherlands, France, Germany and Hungary in 2017 as rising populism could threaten the future of the Eurozone,” the SC said.

Overall, it sees the outlook for the global economy in 2017 to be more positive. Improving PMI in the US, the Euro area and China is reflective of expanding global manufacturing which bodes well for global economic output. (The Purchasing Managers' Index or PMI is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.)
“Furthermore, the expansionary fiscal stance by the US government should provide a timely boost to productivity, setting the tone for higher GDP growth in the US beyond 2017. Led by India, analysts’ expect emerging economies to continue driving global growth in 2017. The Indian economy is on a steady growth path due to structural reforms by the government which has reduced red tape and boosted potential economic growth.

“Russia and Brazil are meanwhile on an improving trajectory and forecast to return to positive economic growth in 2017. Intra emerging market trade has also grown in importance, further improving the outlook for emerging economies,” the SC said.

But the outlook pointed out that downside risks nevertheless remained. China’s growth has shown signs of stability and remains at a strong level relative to many other large economies, but could taper further as efforts continue to set the country on a more sustainable growth path. Furthermore, policymakers’ priorities are expected to centre on ensuring a smooth government leadership transition over perceived risky economic reforms.

The outlook meantime expects prospects for the crude oil market to be bright in the first half of 2017 as demand rises and production is curbed after OPEC and non-OPEC countries agreed to cut production from January.

“However, long-term uncertainty in the world energy market persists as the production cuts measure was only agreed for a short-term period of six months with a review in May 2017.”

Palm oil prices meanwhile have been increasing since early 2016 and are forecast to continue on this trajectory in 2017. Healthy supply outlook from Malaysia and Indonesia is expected to be balanced by demand growth particularly from India.

The outlook said that prospects for emerging market portfolio flows have improved from 2016, given stronger and more diversified economic growth and lower current account deficits. Also emerging market valuations are more attractive with improving earnings growth trends.

“In particular, the MSCI Emerging Market Index is observed to be trading at a discount to the MSCI World Index. Nevertheless, hawkish policy by the US Fed and global political uncertainty could provide volatility to emerging market portfolio flows in 2017.

“The US tightening cycle will likely be countered by continuation of quantitative easing programmes by the European Central Bank and Bank of Japan which might mitigate the levels of capital outflows from emerging market economies. In general, sentiment towards emerging markets is expected to be positive with a rebound in economic activity and potential returns,” the outlook said.